Bonus limit for fund managers rejected in EU parliament vote

The European Parliament narrowly rejected proposals to ban fund managers from receiving bonuses amounting to more than their annual salary amid warnings the plan could backfire by harming pensions and savings.

Lawmakers in Strasbourg, France, defeated the proposal after some legislators argued that the measure would drive up fixed costs for asset managers and curtail returns. The proposed curbs were blocked by a margin of seven votes out of 695 cast.

“Strengthening the financial system is absolutely vital, but we need to do so without becoming vindictive,” Syed Kamall, a U.K. Conservative legislator who opposed the pay limit, said in an e-mail. “The bonus cap would have been hugely damaging to the European asset management industry, which looks after the pensions and investments of millions of Europeans.”

The draft rules for UCITS fund managers would have gone beyond planned EU limits on banker pay that will allow bonuses of twice fixed salary. European asset-management firms were concerned the proposal, which would have affected two-thirds of senior fund managers, would have led to a bidding war for top traders, increasing fixed costs and making the industry more vulnerable to market downturns.

The parliament was weighing whether to add the rules to a draft law proposed by Michel Barnier, the EU’s financial services chief, to toughen UCITS regulation.

Lobbying Flurry

“The flurry of lobbying in the last few days has paid off,” Alex Beidas, an employee-incentives specialist at law firm Linklaters LLP, said in an e-mail. “This is good news for UCITS fund managers, but will also give other sectors comfort.”

Supporters of the measure argued it was necessary to curb irresponsible risk taking, and that consistent pay rules should be applied across the financial services industry.

“It’s a black day for investor protection in Europe,” Sven Giegold, the parliament lawmaker in charge of the draft law, and the architect of the rejected bonus plan, said in a telephone interview. Still, he said, the draft law contains other important measures, including rules to prevent a fraud similar to the Ponzi scheme orchestrated by Bernard Madoff.

The draft law would toughen liability rules for banks that safeguard funds’ assets. It would also ensure that national regulators have the power to impose fines and other sanctions on funds and depositary banks that break consumer-protection rules.

Performance Fees

Today’s vote pitted Christian Democrats, Conservatives and Liberals against Socialists and Greens in a clash over the draft pay rules. Legislators also narrowly rejected planned restrictions on performance fees charged by funds.

The EU assembly backed alternative standards aimed at better aligning pay with performance, including provisions allowing awards to be clawed back when a fund loses money.

It wouldn’t have been “appropriate” for fund managers to face similar bonus curbs to bankers, Sharon Bowles, chairwoman of the assembly’s economic and monetary affairs committee, said in an e-mail after the vote. “Banks have a monopoly on liquidity and lending both of which are ultimately provided at public expense.”

UCITS, or Undertakings for Collective Investment in Transferable Securities, had more than 6 trillion euros ($7.8 trillion) under management as of April 2012, according to the European Commission. The funds are regulated at EU level and have the right to operate throughout the bloc if they meet minimum oversight and investor-protection standards.

‘True Alignment’

The Investment Management Association, which represents U.K. fund managers, said the outcome of the vote would “drive true alignment between asset managers’ pay and the interests of our clients.”

Giegold said that scrapping of the proposed pay limits may speed up negotiations on the legislation with governments. Nations have yet to reach a position on the draft law.

Barnier has urged that work on the law be completed ahead of European Parliament elections that are scheduled to take place next year.